On October 10, Renault and Nissan said they were negotiating the future of the alliance, including a possible reduction of Renault’s stake in Nissan and Nissan’s investment in Renault’s electric vehicle business, which may be the result of the Renault-Nissan alliance since the former helm Carlos the biggest change since Ghosn’s arrest.
Image source: Renault-Nissan Alliance official website
Major changes
Alliance members Renault and Nissan are under increasing pressure as the auto industry makes an inexorable transition to electric vehicles.
Renault has previously said it will split its electric vehicle and internal combustion engine businesses to create two separate entities for future growth. Its electric vehicle and software business entity will be based in France and will employ about 10,000 people by next year; the other entity will specialize in the development and production of internal combustion engines and hybrid powertrains and will be based outside France, also employing about 10,000 people.
Both of Renault’s plans need to be approved and supported by Nissan. First, Renault needs to convince Nissan to agree to its plans for the internal-combustion engine business by setting up an entity for the internal-combustion engine business with Aurobay (a joint venture between Volvo Cars and Zhejiang Geely Holding Group) and other investors, a move that Nissan fears would give a Chinese company access to technology that the alliance has been developing jointly for years. Second, Renault wants to push Nissan to invest in its electric vehicle business.
Nissan is prepared to invest $500 million to $750 million in Renault’s electric vehicle business and take a stake of about 15 percent, a person familiar with the matter said. In exchange, Renault is also willing to sign a plan to gradually reduce its stake in Nissan to 15 percent over time from the current 43 percent. In addition, the two automakers said they are working on “structural improvements to ensure the sustainability of the alliance’s operations and governance”.
However, the reduction of Renault’s stake in Nissan will not happen soon. According to people familiar with the matter, one option being discussed is to place Renault’s planned reduction in Nissan shares in a trust and give Nissan a right of first refusal on any shares sold. Although Nissan may buy back some of its shares, Renault has no immediate plans to sell the shares, as a sale at current prices would result in impairment and Renault may seek to dispose of the shares in an orderly manner.
In addition, people familiar with the matter said the agreement will include provisions to prevent Renault from selling Nissan shares to competitors or rights investors. Renault’s voting rights in Nissan will also be restricted immediately after the deal takes effect. These changes will require the two companies to reach a new operating agreement, the people familiar with the matter said.
Renault’s Nissan shares set aside for sale are currently worth about 4 billion euros ($3.9 billion). Nissan had 1.47 trillion yen ($10.1 billion) in cash and equivalents at the end of June this year, which gives the company enough cash flow to buy back some of its shares while investing in Renault’s electric car business.
Renault is trying to reach an agreement with Nissan before the capital markets day on Nov. 8. The French government, which owns 15 percent of Renault, also needs to approve the plan for both companies. In addition, Renault’s internal combustion engine business plan needs to be approved by the Japanese government and Dongfeng Motor Group, which includes Nissan’s longtime partner in China. Nissan CEO Makoto Uchida has been briefing officials at Japan’s Ministry of Economy, Trade and Industry on the implications of Renault’s split of its electric vehicle and internal combustion engine businesses and potential tie-up with Aurobay.
Alliance relationships may see the balance
The above series of moves will hopefully ease the imbalance and source of friction that has characterized relations within the Renault-Nissan alliance for years. Currently, Renault holds 43 percent of Nissan and has significant control over Nissan, being able to appoint senior management at Nissan. Nissan, on the other hand, holds 15 percent of Renault’s shares, but has no voting rights and therefore no control over the Renault Group. The unbalanced capital relationship between the two automakers has been a controversial issue for Nissan.
Many Nissan executives have argued that the alliance structure is unbalanced, given the progress the two automakers have made in recent years in vehicle development. And for Nissan, the talks could be an opportunity to reset the alliance structure. The need to support Renault’s restructuring plan gives Nissan greater bargaining leverage, and Nissan intends to use the opportunity to make Renault significantly reduce its stake in Nissan and reshape the alliance. The two sides’ shared desire for change opens up a potential path forward.
Previously, Renault had opposed such changes, but that resistance has waned as the company has instead sought to strengthen its cooperation with Nissan on operational projects. Renault executives contend that the alliance with Nissan lives or dies on its ability to move forward with joint production plans, opening the door to a potential ownership change. “All options are on the table. The important thing right now is to keep the core of the alliance and the capital structure of the alliance itself is somewhat irrelevant,” added one of the people familiar with the matter.
Philippe Houchois, an analyst at Jefferies, said in a report, “We find Renault to be open to an alliance change and more confident and decisive in its dealings with Nissan.”
If Renault and Nissan finally reach an agreement, it could mean a new, more equal start for the alliance, which has been in existence for more than 20 years.
